Agricultural policy objectives The farm problem

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Agricultural policy objectivesThe farm problem

• Economics of Food Markets
• Lecture 3
• Alan Matthews

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Lecture objectives

• To examine stated objectives of government
  intervention in agricultural markets
• To review explanations why farm incomes may have
  a tendency to lag behind non-farm incomes
• To discuss alternative patterns of agricultural
  adjustment

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Extensive government intervention in agri-food
markets

• Most countries adopt an active agricultural
  policy. Evidence that policy addresses
  significant and widespread socio-economic issues.
• High share of EU spending on agriculture
• High levels of border protection
• High transfers from consumers and taxpayers to
  agriculture (OECD PSE estimates)

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Rationale for agricultural policy

• food security
• instability of agricultural markets
• lagging farm incomes
• maintenance of the rural population/rural
  development
• environmental and landscape benefits - the
  multifunctionality of agriculture

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Food security

• Market-determined size of agricultural sector may
  mean relying on food imports
• Food security often equated with food
  self-sufficiency
• What is risk to food supply in developed
  countries?
• Sources of risk (war, disease, climate)
• Input markets may be more vulnerable than product
  markets
• Risk a function of diversification of import
  sources
• Huge overproduction in relation to subsistence
  needs
• Self-sufficiency not necessarily the most
  efficient response (stocks, supply contracts)

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Objectives of the Common Agricultural Policy

• Article 39 objectives
• to increase agricultural productivity
• to ensure a fair standard of living for the
  agricultural community
• to stabilise markets
• to ensure the availability of supplies
• to ensure that supplies reach consumers at
  reasonable prices
• Generally, income objectives dominate farm policy
  objectives in developed countries, although
  rarely defined very explicitly

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Sources of price instability
P
P
Q
Q
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The cobweb model of price instability- where
supply is a function of lagged price
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..but some problems

• Even cycles require equal supply and demand
  elasticities
• Naïve expectations mechanism
• Observed cycles tend to be twice as long as those
  predicted by model
• Note that price and output instability offset
  each other from the point of view of revenue or
  income instability
• but basic insight remains valid

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Declining terms of trade

• Demand grows slowly because of slow population
  growth and Engels Law
• Supply grows more rapidly due to technological
  change
• Treadmill effect
• Rising living standards in nonfarm sectors

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Why does farm labour market not return to
equilibrium?

• With downward pressure on farm incomes, we expect
  outmigration from farming to restore relative
  incomes why does this not happen?
• love of farming nonpecuniary considerations
• Market imperfections barriers to movement
• Human capital explanation markets do work
• Fixed asset theory resources trapped in
  agriculture

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Illustration fixed asset theory
Supply of labour
P
Acquisition cost
Demand for labour (MVP)1
Demand for labour (MVP)2
Salvage value
Labour supply should fall from Q1 to Q2 as a
result of the fall in the demand for labour, but
decision to exit is made with respect to the
salvage price, so labour Q1Q2 is trapped in the
sector
Q3
Q2
Q1
Q
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Agricultural adjustment and the farm problem

• price instability in a supply-demand framework
  caused by low price elasticities of supply and
  demand
• agricultural adjustment in a supply-demand
  framework the treadmill of technical change
  together with Engels Law drives food prices down
  and leaves farms unviable
• technological change and input substitution also
  encourage farm amalgamation and lower the demand
  for labour in agriculture
• low farm incomes result from sticky labour
  supply response
• barriers to exit
• neoclassical human capital explanation
• fixed asset theory

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The pattern of agricultural adjustment

• Changes in resource use reduction in labour
  input accompanied by intensification through
  greater use of variable and capital inputs
• Changes in output mix farm diversification into
  niche, exotic or higher value added activities
• Increased size of farm business and increased
  specialisation
• Reduction in farming activity either through
  part-time farming and pluriactivity or through
  retirement and exit
• growing concentration of production and output on
  larger farms accompanied by the growing
  marginalisation of small-scale farming, leading
  to increased differentiation in farming
• Differences in survival strategies depends on the
  resource base of the family farm and family
  circumstances.

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Recommended readings

• Gardner Farm Problem
• See also Matthews 2003 in Lecture1